The Loan Insurance Concept – Should You Go for It?

Rahul is a young IT professional working in a reputed multi-national company. He has settled down into the job well and is earning handsomely. He has a young loving family to support. Rahul has invested his hard-earned money into acquiring his dream home in the heart of the city. He has applied for a Home Loan of Rs. 40 Lakhs to supplement his savings.

He is paying the instalments on time for the past one and a half years. Suddenly, he meets with an accident rendering him immobile. His dreams lie shattered as he loses his job and thereby the only source of income. Being bed-ridden he is not able to generate revenue to support his family and pay the EMIs (Equated Monthly Instalments). The bank has no option but to take possession of the house and auction it.

Could he have done differently under the circumstances? It can surprise you that he could have done so by taking loan insurance. The insurance company could have come to his aid and ensured that he did not lose the house. Let us now explore the concept of ‘Loan Insurance’ and understand its benefits.

What is loan insurance?

Loan Insurance is a kind of insurance policy that can protect the loan repayment if the borrower becomes unemployed or suffer a crippling accident. It can also come to the aid of the family members if they lose their breadwinner.

What are the benefits of taking loan insurance?

Loan insurance provides you with insurance cover to take care of the loan instalments or the outstanding loan amounts in the following circumstances:

Death of the principal borrower

Incapacity of the primary borrower

Loss of job thereby depriving the family of regular income

The insurance company undertakes to provide adequate coverage to the borrower and the family and save them from the financial trauma of paying off the loans. In case of joint loans, both the applicants can opt for loan insurance. It serves as a reassurance that the insurance company is there to take care of the loan liabilities should something go wrong with either of the borrowers.

What kind of loans do the loan insurance policies cover?

Home Loans are big-ticket loans. One spends a lifetime repaying them. Hence, it is natural that people prefer to take loan insurance policies to cover their Home Loans. However, some banks have loan insurance policies to cater to other loans like Personal Loans and Car Loans. Generally, you can Apply for Home Loan Deals that offer loan insurance.

Is there a premium for such loan insurance?

Yes, you have to pay the premium for availing Home Loan insurance. The premium can vary from bank to bank depending on various factors. Some of the significant factors that determine the Home Loan insurance premium are as follows:

The age of the borrower is the primary factor. The older you are, the more significant is the premium.

Similarly, the loan amount is a critical factor as well. The premium is directly proportional to the loan amount.

The tenure of the loan has an impact on the premium. You need to cover the loan for the entire tenure. The insurance companies face a higher risk because of the more extended period. Hence, the premium is also higher.

The medical record of the borrower is also a clinching factor in determining the premium amount. In case the borrower is already suffering from health issues, the premium goes up accordingly.

Keep these points in mind while opting for loan insurance

Understand what the policy covers and does not cover. Does it cover death by accident or natural death? Is there a benefit to cover temporary disability or does the insurance policy cover only permanent disability?

Check out the eligibility. Some banks have fixed an amount below which you cannot buy loan insurance.

The premium is an essential aspect of loan insurance. Some banks seek a lump sum payment whereas some allow payment of insurance premium in instalments. Check out whether the bank includes the premium in the loan amount. It can be beneficial as you need not make the payment in advance.

Some loan insurance policies need a mandatory medical check-up. Confirm with your bank in this regard.

Look out for the tax benefits. In case you make the lump sum payment of the premium, you get income tax benefits under Section 80C of the Income Tax Act 1961. However, you cannot avail this benefit if the bank includes the premium as part of the loan.

Loan insurance is as important as your Life Insurance. Remember, you do your family a tremendous favour by not burdening them with the loan instalments in case you are not around.

It brings us to the question, “Should you opt for loan insurance?” The answer is a resounding YES.

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